Extending home-buyer credit: another clunker?

Congress wants to extend the $8,000 home-buyer credit. Critics say it's not that helpful and mostly benefits home sellers.

By , Staff writer

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    Sen. Johnny Isakson (R) of Georgia, looks on at left, as Senate Banking Committee Chairman Sen. Christopher Dodd (D) of Connecticut gestures during a news conference on Capitol Hill in Washington, Thursday, to announce the extension of the home owner tax credit.
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Congress is moving to extend a tax credit for home buyers, but the move is no cure-all for a troubled housing market.

Economists say the $8,000 credit for first-time buyers, enacted earlier this year, has exerted some upward pressure on home prices and revved up the pace of sales.

At best, however, it’s just part of the fix for housing.

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On Wednesday, key members of the US Senate agreed to extend the existing tax credit for first-time home buyers and offer a smaller credit to repeat buyers who have owned homes for at least five years. The measure, backed by Senate Majority Leader Harry Reid (D) of Nevada, would offer the credit through next April.

Leaders in the House of Representatives have also said they support extending the credit, which may cost about $10 billion.

Congress is moving at a time when the housing market has been showing tentative signs of stabilization, but also amid worries that demand for homes will cool when the current tax credit expires at the end of November.

Supporters say extending the credit will bolster demand and further stabilize home prices after a historic drop. But critics want to see the housing market find a genuine equilibrium, not one with prices propped up by taxpayers.

"Home sales have picked up this year. Why? ... The biggest stimulus to home sales this year has been the drop in the prices of these homes," argues economist Paul Kasriel in a written report for the financial firm Northern Trust Co. in Chicago.

He sees the tax credit as "gimmicky" compared with the role that affordable prices have played in reviving buyer demand. In addition to home prices, key factors affecting real estate will be mortgage interest rates and the health of the job market.

Similarly, finance experts Simon Johnson and James Kwak argued this week in the Washington Post that the credit's main impact is to push up home prices by about $8,000 – something of dubious economic benefit to anyone but the home seller in their view.

Economists generally agree the tax credit is not the biggest reason for some recent stabilization in the housing market. But backers of the credit say it has stimulated a significant amount of demand at a bad time. Early this year, many potential buyers and sellers felt as if there was no bottom in sight for home prices. Many were waiting to see how low prices would go.

Now, even some housing experts who supported the original tax credit in February say it can be allowed to expire without damaging the market. Others, including the real estate industry, want to see it extended to buoy a nascent recovery.

Supporters have the legislative momentum, despite public concerns about the rising cost of government stimulus programs.

An estimated 40 percent of homes sold this year have gone to first-time buyers, Patrick Newport, an economist at IHS Global Insight in Lexington, Mass., told a congressional panel this month. But 10 percent of all sales have gone to first-time buyers who would not have bought without the tax credit.

"The main effect of the tax credit is to shift demand from 2010 into 2009," Mr. Newport said. "Once the tax credit expires, demand will take a hit.... Our view is that home prices will drop another 5 percent from current levels, hitting bottom in 2010."

He took no position on whether the tax credit should be extended or not.

Mr. Johnson and Mr. Kwak hold that the tax credit is essentially a subsidy for people selling homes. It lets people pay about $8,000 more for something they want to buy anyway. That $8,000 represents about 5 percent price boost for the median home in America right now.

"Housing is something that all people need," they write. "Why do we want it to be expensive?"

Of course, homes are also a source of wealth for homeowners, and collateral that banks rely on if they have to foreclose on a mortgage loan. By helping to push up home prices, the tax credit is arguably propping up confidence in the wider economy.

The debate over tax credits echoes another federal stimulus program that was also extended temporarily, the "cash for clunkers" incentive for car buyers. A report this week finds that program has similar shortcomings as the housing credit.

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